by The Milton Measure on Friday, December 9th, 2011
The Eurozone is a group of 17 European countries that share a single currency, the Euro (€), which is managed by the European Central Bank. The Eurozone’s initial purpose was to make international trade among its members easy and to link European into one trading power. It is a unique kind of union; its members have their own economies but a common monetary policy. In effect, all Eurozone economies, whether successful or not, are tied together. The Eurozone’s underlying problem is thus that the collapse of one economy negatively affects the entire union.
Measures are in place to prevent collapse. In order to be a Eurozone member, a country must have debt less than 60% of its GDP. In 2001, Greece was accepted into the Eurozone under that condition; by 2010, however, Greece’s debt had ballooned to 150% of GDP. Greece’s debt grew at an astounding rate due to uncontrolled spending and borrowing. In addition, Greece’s use of the Euro allowed it to borrow debt at a lower rate than it would otherwise have enjoyed. As Greece’s massive debt became a threat to the Eurozone, other Eurozone nations decided to bail Greece out. On May 2, 2010, €110 billion were given to Greece. The Eurozone countries gave about 80% of the money, with the International Monetary Fund (IMF) providing the rest.
Unfortunately, the Greek crisis was just the beginning of the Eurozone’s problems. Portugal, Ireland, Italy, and Spain are now facing problems similar to Greece’s. Ireland received an €85 billion bailout, Portugal got a €78 billion one, and Greece received 2 more bailouts of €110 billion and €80 billion. All these bailouts aimed to prevent the financial meltdown that would occur if a country left the Eurozone.
If one Eurozone country leaves, others may follow due to increasing market pressures; such pressures will be particularly harsh for weak economies. Any countries that stay in the Eurozone would suffer massive losses on their banks’ investments in indebted countries that leave the union, while former Euro members with weaker new currencies would experience a collapse in export demand.
The result: a mess, where the Euro’s stronger members end up losing money and its weaker members stay in debt. As we have seen in Greece, the bailouts have not worked. If nothing changes in the Eurozone, it will fail.
As the European economy circles the drain, it will certainly take other countries with it, including the United States. If Europe’s recession becomes any worse, the US would lose a significant amount of trade with Europe, and American banks would lose the billions of dollars they have invested in Europe.
As the current state of the Eurozone suggests that the exit of several nations and the mass failure of European banks are inevitable, enormous economic repercussions in the United States are all but certain.
Until European governments control their budgets, bailouts and other measures will have no long term benefits. The Euro will eventually fall, and the European economy will contract. While the idea of a monetary union once seemed a key facet of European and global economic integration, it now threatens to banish the Eurozone and the United States into an economic abyss. sidered a contradiction of the open environment that Milton strives to provide its students.
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